Consumer Proposal

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What Is A Consumer Proposal?

Every year, millions of people find themselves overwhelmed by financial difficulties. For many, these challenges aren't due to poor decisions or mismanagement. Often, families are simply unprepared for the unexpected financial pressures that can arise. When debt becomes too much to handle, a consumer proposal can offer a viable solution to help clear the slate and regain financial stability.

A consumer proposal is a legally binding debt relief option managed by a Licensed Insolvency Trustee (LIT). In this process, you work with the LIT to create a proposal for your creditors. The goal of the proposal is to establish a fair repayment plan that benefits both you and your creditors. Typically, the amount you owe is reduced to a level that is more manageable for you, while still being reasonable for the creditors.

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What Happens When You File For A Consumer Proposal?

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When you file a consumer proposal, you'll work closely with a Licensed Insolvency Trustee (LIT) who will handle the communication with your creditors, file the necessary paperwork, and guide you throughout the process. Entering a legal procedure can be daunting, especially when your finances are at stake. Here’s what you can expect when you file a consumer proposal:

1. Your LIT Files Your Consumer Proposal
The first step is for your LIT to file the consumer proposal with the Office of the Superintendent of Bankruptcy (OSB). Once it's filed, you will no longer need to make direct payments to your creditors. Additionally, any wage garnishments or actions by collection agencies will stop immediately. By law, creditors and debt collectors are also prohibited from contacting or harassing you regarding your debt.

2. The Proposal
After the proposal is filed, your LIT will work to prepare the proposal for your creditors. This document will outline your financial situation and explain why you can only afford to pay the reduced amount.

3. Your Creditors' Decision
Your creditors will have 45 days to review the proposal. They can either accept or reject it during this period.

How Does the Creditor Consumer Proposal Voting Work?

What Happens If the Creditors Reject Your Proposal?

If your creditors reject your proposal, you will have the opportunity to review and revise it, making adjustments that may lead to their acceptance. The goal is to come to an agreement that works for both parties. However, if an agreement cannot be reached, you may need to explore other debt relief options, such as filing for bankruptcy.

What Happens If the Creditors Accept Your Proposal?

If your creditors accept your proposal, you will begin to fulfill the terms of the agreement. Depending on the terms of the proposal, you may be required to make a lump sum payment or periodic payments to your Licensed Insolvency Trustee (LIT), who will then distribute the payments to your creditors.

Typically, you’ll have up to five years to repay the agreed-upon portion of your debt. Once you’ve completed all the payments and the terms of the proposal are fulfilled, you will be released from the remaining debts. You will also receive a "certificate of full performance" as proof that you have successfully completed the program.

The acceptance or rejection of your consumer proposal is based on the total amount of debt owed to the creditors, rather than the number of creditors who vote. For the proposal to be accepted, the total dollar value of the creditors who vote in favor must be at least 50% plus one of the total debt owed.

For example, if you owe $100,000, the creditors who approve the proposal must represent at least $50,001 in debt. If the total amount of approving creditors is below this threshold, the proposal will be rejected.

Are There Any Qualifications?

Consumer proposals aren't suitable for everyone, as each individual's financial situation is unique. To be eligible to file a consumer proposal, you must meet several criteria, in addition to being insolvent:

  • Be an individual: Only individuals can file a consumer proposal, not businesses.

  • Have more than $5,000 in unsecured debt but no more than $250,000: This amount does not include your mortgage.

  • Have a stable income: You must have a reliable source of income to ensure you can make the required monthly payments.

  • Be unable to pay off your debts in full with interest: You must be in a situation where paying your debts in full is not feasible.

  • No open prior consumer proceedings: If you have previously filed a consumer proposal, it must be fully discharged before filing another one.

  • Pending proposals: If you have an active consumer proposal, you cannot file a new one until all claims from the previous proposal have been settled, or you have filed for bankruptcy.

Benefits of Filing a Consumer Proposal

Filing a consumer proposal can offer significant advantages, especially when compared to other debt relief options like bankruptcy. Here are some key benefits:

  • No Surplus Income Concerns: Unlike bankruptcy, where surplus income can affect your payments, with a consumer proposal, you don’t need to worry about paying extra based on your income.

  • Asset Protection: Your assets will not be seized in a consumer proposal, allowing you to retain ownership of your property.

  • Fixed Payments: Your monthly payments will remain the same, even if your income increases during the process.

  • Less Severe Impact on Your Credit: A consumer proposal typically results in an R7 credit rating, which is less damaging than the R9 rating resulting from bankruptcy.

  • Pay Only a Portion of Your Debts: You will only be required to repay a portion of your total debt, making it more manageable to settle your financial obligations.

Disadvantages of Filing a Consumer Proposal

While a consumer proposal can be a valuable tool for managing debt, it's important to consider its limitations. Here are some key drawbacks:

  • Limited Debt Inclusion: You cannot choose which debts to include in the proposal. All unsecured debts, such as personal loans, credit cards, and lines of credit, must be addressed.

  • Excludes Alimony and Child Support: Any outstanding alimony or child support obligations will not be included in the proposal.

  • Student Loan Debt: Your current student loan obligations are generally not covered, unless they are more than seven years old.

  • Secured Debts Not Included: Debts tied to assets, like mortgages and car loans, are not part of the proposal.

  • Risk of Rejection by Creditors: Some creditors may choose not to accept the proposal, regardless of your financial situation.

  • Defaulting Consequences: If you default on the proposal, you cannot file a second one. It's essential to be certain you can follow through before proceeding.

  • Long-Term Credit Impact: A consumer proposal remains on your credit report for six to seven years, which can negatively affect your future ability to access credit.

How Does a Consumer Proposal Affect Credit?

When you file a consumer proposal, you are essentially negotiating with your creditors to repay a portion of the total amount you owe over an agreed-upon period. Despite the reduction in your debt, the debt still exists in the eyes of credit reporting bureaus (Equifax and TransUnion) and with the creditor.

Filing a consumer proposal will result in a credit rating of R7, one of the lowest possible ratings. This will remain on your credit report for 6-7 years (depending on your province), or 3 years after your consumer proposal is completed, whichever comes first.

This R7 rating can impact your ability to obtain credit in the future. However, with time, responsible financial management, and effort, you can rebuild your credit. To help ensure your credit report is accurately updated, you can provide a copy of your “certificate of full performance” to the credit bureaus to confirm the successful completion of your consumer proposal.

Filing a Joint Consumer Proposal

In some cases, shared debt can be filed jointly in a consumer proposal, particularly when two individuals are equally responsible for the debt, such as when they co-sign a loan. This is commonly seen among married couples or those who live together, although it can apply to other situations as well. A joint consumer proposal can be filed when the individuals involved share "all or substantially all" of their debts. However, the term "substantially all" is not strictly defined, so your filing will be based on the specifics of your situation.

It’s important to note that even if you file a joint consumer proposal, each individual remains responsible for their share of the payments. If one person is unable to make their payments, the other person will be fully responsible for the total amount due. Additionally, if either party fails to meet the payment terms, the proposal could be annulled, leaving both individuals at risk.

FAQs Consumer Proposal

Can You Be Rejected for a Consumer Proposal?

Yes, there are several reasons why your consumer proposal may be rejected. Some of the most common reasons include:

  • Not meeting the eligibility criteria (your unsecured debt must be between $5,000 and $250,000).

  • If most or all of your debt is secured (like a mortgage or car loan).

  • If your proposal is deemed unfair by your creditors.

Can You Switch from Bankruptcy to a Consumer Proposal?

Yes, it’s possible to switch from bankruptcy to a consumer proposal. This may occur if, after declaring bankruptcy, your financial situation improves (e.g., you find a new job with higher income). In such cases, a consumer proposal can help reduce your monthly payments by extending the repayment term, making it more manageable. This benefits both you and your creditors, as you can pay back a larger portion of your debt.

Can You File for a Consumer Proposal if You Have Debt Over $250,000?

If your debt exceeds $250,000, a standard consumer proposal is not an option. In this case, you might consider a Division 1 Proposal, which has no debt limit. However, if your creditors reject this type of proposal, it automatically leads to bankruptcy. It’s advisable to consult with a debt specialist to determine the best path for your situation.

If you miss three or more of your monthly payments, your consumer proposal will be annulled. This means your creditors will be free to pursue the full amount of your debt and can resume collection efforts, including contacting you for payment and taking other actions such as garnishing wages.

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A consumer proposal can be a valuable alternative to bankruptcy for those facing financial challenges. To determine if you qualify for a consumer proposal and to explore your options, it’s highly recommended that you consult with a debt specialist. They will guide you through the process and help you make an informed decision about your financial future.

The sooner you reach out to a debt specialist, the sooner you can begin your journey toward financial recovery. If you’d like to connect with a debt expert in your area, Loans Canada can help.

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